An e-commerce startup for the multitudes

On July 26, 2018, Pinduoduo, China’s social e-commerce company, launched its initial public offering on the Nasdaq market.

Pinduoduo’s stock prices shot up by more than 30 percent on the first day of trading and its market value reached nearly US$30 billion, or more than half of that of JD.com, the second largest Chinese e-commerce player behind Alibaba.

Pinduoduo was founded in Septem¬ber 2015. Pinduoduo’s active user base went from zero to 100 million in the first year and then to 200 million in the second year. By the end of March 2018, Pinduoduo boasted 344 million active users on its platform, making it probably the world’s fastest growing company in terms of client acquisition. (According to its latest annual report, Alibaba had 552 million active users in 2017.)

As Pinduoduo’s user base expanded, its trading volume also grew exponentially. In the twelve-month period ending June 30, 2018, Pinduoduo reported a GMV (gross merchandise value) of 262.1 billion yuan (US$39.6 billion), which represented a whopping 583 percent increase from a year ago. Now in its fourth year of operation, Pinduoduo is a solid third in the fiercely competitive e-commerce market in China after Alibaba and JD.com.

According to the National Bureau of Statistics of China, China’s per capita disposable income in 2017 was US$3,782 (the median number was US$3,263), which translates to slightly below US$300 per month. While in China’s affluent coastal regions income levels are much higher than the national level, its vast inland provinces and particularly their rural population are nowhere near US$300 per month.

The real ity is that there are approximately 1 billion Chinese living in small cities and townships and they are much more price sensitive than the shoppers you meet at a Gucci store in a first- or second-tier city. Indeed, at least two thirds of Pinduoduo’s customers come from outside of the target audience of a typical e-commerce outlet.

Colin Huang, the founder of Pinduoduo, was born in 1980 in an ordinary family in Hangzhou. He joined Google in 2004 after getting his post-graduate degree in Computer Science from the University of Wisconsin. He has since left Google and started several businesses in China.

In early 2015, it dawned upon Huang that despite the dominant market posi¬tions of the likes of Alibaba, Tencent and JD.com in China’s Internet space, it is still possible to compete with them head-on if he could address the needs of the segment of Chinese consumers who are essentially ignored by the titans of the industry.

Huge market

Pinduoduo got the attention of the under-served, price-sensitive consumers by presenting them with a proposition they could not turn down.

For example, for a dress that is priced at 39 yuan on Taobao, one only needs to pay 19 yuan on Pinduoduo; and if one can invite 5 friends to buy as a group, the unit price falls to only 9.9 yuan, including delivery. The process of inviting friends to join is made very easy on Tencent’s WeChat messaging platform. As folks join in this viral “game” of seeking deep group discounts, they sign onto Pinduoduo’s apps without much noticing it.

The fact that Pinduoduo was able to quickly penetrate the previously under-tapped market segment was helped along by at least two other factors. Xiaomi and other domestic manufacturers success-fully marketed a series of low-priced smart phones that allowed people from the countryside to connect via mobile to the Internet. WeChat, the premier instant messaging platform, is a ubiquitous pres¬ence among all sectors of Internet users with its superb package of online games, social networks, and seamless payment functions. In short, Pinduoduo did the right thing at the right time.

Unlike JD.com and Tmall which take a cut of each transaction on their platforms, Pinduoduo makes its money mainly from advertising income. Its business model makes it difficult to take a percentage cut of an already “dirt-cheap” sales price.

While Pinduoduo has the strong backing of powerful players in China including Tencent and SF Express, profitability for Pinduoduo is not guaranteed at this point.

For its investors, the hope is that over time Pinduoduo will be able to find new revenue sources from its huge client base without fundamentally changing its business logic.

Winter Nie is Professor of Management at IMD (International Institute for Management Development). She wrote the article with Yunfei Feng. Copyright: IMD.